Avon 2008 Annual Report Download - page 39

The results in China for 2008 were negatively impacted by the
earthquake and subsequent flooding that occurred during the
second quarter of 2008.
The increase in operating margin for 2008 was primarily driven
by the impact of higher revenue and lower product costs, parti-
ally offset by ongoing higher spending on RVP and advertising
and costs associated with the 2008 earthquake and floods.
Operating margin for 2007 benefited from higher reductions in
reserves for statutory liabilities.
For information concerning an internal investigation into our
China operations, see Risk Factors and Note 15, Contingencies.
China – 2007 Compared to 2006
%/Point Change
2007 2006 US$
Local
Currency
Total revenue $280.5 $211.8 32% 26%
Operating profit 2.0 (10.8) * *
Operating margin .7% (5.1)% 5.8 5.5
Units sold 19%
Active Representatives 145%
* Calculation not meaningful
Total revenue in China increased significantly in 2007, primarily
due to an increase in Active Representatives reflecting further
expansion of the direct-selling business, which contributed over
one half of the region’s revenue in 2007. Active Representatives
increased significantly in 2007 due to Representative recruiting,
as well as the absence of a meaningful base comparison for the
first half of 2006. The lower average order was mainly due to a
higher share of sales from new Representatives. At the same
time that we have been building on direct selling, we have seen
ordering activity levels maintained by our beauty boutiques as
they continue to engage in direct selling by servicing our Repre-
sentatives. Additionally, the number of beauty boutiques has
remained stable over the last year. Revenue in 2007 benefited
from representative recruiting and continued significant invest-
ments in advertising.
The increase in operating margin for 2007 was primarily driven
by the impact of higher revenue and a reduction of a reserve for
statutory liabilities. These positive impacts were partially offset by
ongoing higher spending on RVP and fees paid to registered
service centers for providing services to our Active
Representatives.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of funds historically have been cash flows
from operations, commercial paper and borrowings under lines
of credit. We currently believe that existing cash, cash from
operations (including the impacts of cash required for restructur-
ing initiatives) and available sources of public and private financ-
ing are adequate to meet anticipated requirements for working
capital, dividends, capital expenditures, the share repurchase
program, possible acquisitions and other cash needs in the short
and long term.
We may, from time to time, seek to repurchase our equity in
open market purchases, privately negotiated transactions, pur-
suant to derivative instruments or otherwise. During 2008, we
repurchased approximately 4.6 million shares of our common
stock for an aggregate purchase price of approximately $172.
Retirements of debt will depend on prevailing market conditions,
our liquidity requirements, contractual restrictions and other
factors, and the amounts involved may be material. We may also
elect to incur additional debt or issue equity or convertible secu-
rities to finance ongoing operations, acquisitions or to meet our
other liquidity needs.
Any issuances of equity securities or convertible securities could
have a dilutive effect on the ownership interest of our current
shareholders and may adversely impact earnings per share in
future periods.
Our liquidity could also be impacted by dividends, capital expen-
ditures and acquisitions. At any given time, we may be in the
process of discussing and negotiating an acquisition. An acquisi-
tion may be accretive or dilutive and by its nature, involve num-
erous risks and uncertainties. See our Cautionary Statement for
purposes of the “Safe Harbor” Statement under the Private
Securities Litigation Reform Act of 1995.
While recent turmoil in global financial markets has limited
access to capital for many companies, in 2008 we did not
experience any limitations in issuing commercial paper, reflecting
our investment-grade credit rating (Standard and Poor’s rating of
single A and Moody’s rating of A2). In addition, our commercial
paper program is fully supported by a revolving line of credit,
which is described below under “Capital Resources”. Manage-
ment is not aware of any issues currently impacting our lenders’
ability to honor their commitment to extend credit under the
revolving line of credit. It is unclear the extent to which this
credit crisis will persist and what overall impact it may have
on Avon.
A V O N 2008 33